HOSTETTER LEEP v INLAND DEVELOPM

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No. 13429 I N THE SUPREME COURT O THE STATE O M N A A F F O T N 1977 ROBERT J . HOSTETTER and ELDON H. LEEP, d / b / a D T H TOUCH, UC P l a i n t i f f s and A p p e l l a n t s , INLAND DEVELOPMENT CORPORATION O F MONTANA, a c o r p o r a t i o n , and B I G S K Y O MONTANA, I N C . , a c o r p o r a t i o n , F D e f e n d a n t s and R e s p o n d e n t s . Appeal from: D i s t r i c t Court of t h e Eighteenth J u d i c i a l District H o n o r a b l e W. W. L e s s l e y , J u d g e p r e s i d i n g . C o u n s e l o f Record: For Appellant: B e r g , A n g e l , A n d r i o l o a n d Morgan, Bozeman, Montana Ben E . Berg a r g u e d and R i c h a r d J . A n d r i o l o a r g u e d , Bozeman, Montana For Respondents: Thomas I . S a b o , Bozeman, Montana Brown, P e p p e r a n d Kommers, Bozeman, Montana Gene I . Brown a r g u e d , Bozeman, Montana F o r Amicus C u r i a e : J . David P e n w e l l a r g u e d , Bozeman, Montana K o l t e r , H e a t h and Kirwan, Bozeman, Montana Submitted: Decided: Filed: i J a n u a r y 11, 1977 :flAR i : JLJ/{ , C h i e f J u s t i c e P a u l G. H a t f i e l d d e l i v e r e d t h e O p i n i o n o f t h e Court. Mr. T h i s i s a n a p p e a l from t h e d i s t r i c t c o u r t , G a l l a t i n County, d e n y i n g a p p e l l a n t s ' f o r c l o s u r e on a m e c h a n i c ' s l i e n . On A p r i l 22, 1974, a p p e l l a n t s , d o i n g b u s i n e s s a s Dutch Touch, e n t e r e d i n t o a c o n t r a c t w i t h I n l a n d Development Corp o r a t i o n o f Montana, a s u b s i d i a r y o f I n l a n d C o n s t r u c t i o n C o r p o r a t i o n o f Minnesota. I n l a n d Development was t h e p r i m a r y c o n t r a c t o r r e s p o n s i b l e t o Big Sky o f Montana, I n c . f o r t h e G l a c i e r Condominium P r o j e c t l o c a t e d i n Meadow V i l l a g e a t Big Sky, Montana. The p r o j e c t c o n s i s t e d o f 1 4 b u i l d i n g s which housed 64 condominium u n i t s . The Dutch Touch c o n t r a c t i n v o l v e d t h e c o n s t r u c t i o n of ceramic bathtub e n c l o s u r e s i n each i n d i v i d u a l u n i t , w i t h no work o n t h e common a r e a s t o b e p e r f o r m e d . This was a s i n g l e c o n t r a c t , t h e b a s i s o f payment t o be t h e t o t a l number o f q u a r e f e e t o f t i l e l a i d . Dutch Touch commenced work on t h i s c o n t r a c t d u r i n g A p r i l 1974. On August 20, 1974, Big Sky f i l e d and r e c o r d e d a d e c l a r a t i o n o f u n i t o w n e r s h i p c o v e r i n g t h e Glacier Condominiums. Dur- i n g September, O c t o b e r , and November, 1974, Big Sky s o l d 1 8 o f t h e 64 condominium u n i t s t o t h i r d p a r t i e s . Dutch Touch c o m p l e t e d t h e t i l e work on March 24, 1 9 7 5 , c l a i m i n g t h e amount d u e f o r l a b o r , m a t e r i a l , and s u p p l i e s t o b e $14,554.60. $13,038.12, A s o f J u n e 1 8 , 1975, Dutch Touch had r e c e i v e d l e a v i n g $1,516.48 u n p a i d . On J u n e 1 8 , 1 9 7 5 , Dutch Touch f i l e d a s i n g l e m e c h a n i c ' s l i e n f o r t h e u n p a i d b a l a n c e upon t h e r e a l p r o p e r t y and p r e m i s e s encompassing t h e 1 4 b u i l d i n g s and 64 u n i t s o f t h e G l a c i e r Condominiums. On August 1 9 , 1 9 7 5 , Dutch Touch i n i t i a t e d a f o r c l o s u r e a c t i o n i n d i s t r i c t c o u r t s e e k i n g a p e r s o n a l judgment a g a i n s t I n l a n d Development on t h e c o n t r a c t and e n f o r c e m e n t o f i t s l i e n a g a i n s t t h e i n t e r e s t o f Big Sky i n t h e G l a c i e r Condominiums. A l i s pendens was a l s o f i l e d a t t h i s t i m e . A t h i r d p a r t y a c t i o n was f i l e d by Big Sky a g a i n s t I n l a n d C o n s t r u c t i o n on t h e p r i m a r y c o n t r a c t . The t r i a l on t h i s t h i r d p a r t y c o m p l a i n t was suspended u n t i l t h e d e t e r m i n a t i o n o f t h e l i e n foreclosure. The d i s t r i c t c o u r t , s i t t i n g w i t h o u t a j u r y , e n t e r e d judgment a g a i n s t Dutch Touch upon t h e f o l l o w i n g c o n c l u s i o n s o f law: 1) T h a t t h e G l a c i e r Condominium P r o j e c t became s u b j e c t t o t h e p r o v i s i o n s o f t h e Montana U n i t Ownership A c t , sections R.C.M. 67-2301 e t s e q . , / 1 9 4 7 , by r e a s o n o f t h e f i l i n g o f t h e d e c l a r - a t i o n by Big Sky on August 20, 1974; 2) t h a t a l i e n c o v e r i n g t h e e n t i r e p r o j e c t was i n v a l i d u n d e r s e c t i o n 67-2324, R.C.M. 1947; and 3 ) t h a t Dutch Touch f a i l e d t o e s t a b l i s h a l i e n a g a i n s t a n y i n d i v i d u a l u n i t i n t h e G l a c i e r Condominium P r o j e c t . Two i s s u e s a r e p r e s e n t e d f o r r e v i e w : 1) Was Dutch T o u c h ' s s i n g l e l i e n r e n d e r e d i n v a l i d when Big Sky f i l e d t h e declaration? 2 ) Was Dutch Touch e n t i t l e d t o f o r e c l o s e a g a i n s t o n l y t h o s e u n i t s owned by Big Sky f o r t h e e n t i r e amount o f t h e lien? This i s a c a s e of f i r s t impression, t h e i n t e r p r e t a t i o n o f s e c t i o n 67-2324, R.C.M. 1 9 4 7 , a s it r e l a t e s t o a s u b c o n t r a c t o r ' s l i e n a r i s i n g from work p e r f o r m e d and m a t e r i a l s s u p p l i e d d u r i n g t h e i n i t i a l c o n s t r u c t i o n o f a condominium p r o j e c t . The i n t e r e s t i n u n i t o w n e r s h i p l e g i s l a t i o n was g e n e r a t e d by f e d e r a l l e g i s l a t i o n making F e d e r a l Housing A d m i n i s t r a t i o n i n s u r a n c e a v a i l a b l e f o r condominiums, p r o v i d e d t h a t s t a t e l a w concerning u n i t ownership e x i s t e d . p r o v i d e d a Model A c t followed. 1 2 USCS § 1715 y ( a ) . FHA t h e n which many s t a t e s , i n c l u d i n g Montana, The p r i m a r y p u r p o s e of t h i s condominium l e g i s l a t i o n i s t o i n s u r e t h e c o m p a t a b i l i t y of such housing p r o j e c t s w i t h pre- e x i s t i n g law. 77 Harvard L. Rev. 777 ( 1 9 6 4 ) . Under t h e p r e - e x i s t i n g l i e n law o f Montana, Dutch Touch would b e e n t i t l e d t o a b l a n k e t l i e n e f f e c t i v e a g a i n s t t h e e n t i r e condominium p r o j e c t . T h i s i s s o s i n c e t h e work was performed u n d e r o n e c o n t r a c t , and n o t a s e r i e s o f s e p a r a t e c o n t r a c t s f o r each u n i t . C a i r d Eng. Works v . Seven-Up Min. Co., 1 1 Mont. 1 471, 1 1 P.2d 267 ( 1 9 4 1 ) . 1 W e must now d e t e r m i n e what e f f e c t s u b j e c t i n g t h e p r o p e r t y t o t h e Montana U n i t Ownership A c t h a s upon t h e l i e n o f Dutch Touch. S e c t i o n 67-2324, R.C.M. 1947, s t a t e s : " ( 1 ) S u b s e q u e n t t o r e c o r d i n g a d e c l a r a t i o n and w h i l e t h e p r o p e r t y r e m a i n s s u b j e c t t o s e c t i o n s 672302 t o 67-2342, no l i e n s h a l l a r i s e o r b e e f f e c t i v e against t h e property. During s u c h p e r i o d l i e n s o r encumbrances s h a l l a r i s e o r b e c r e a t e d o n l y a g a i n s t e a c h u n i t and t h e u n d i v i d e d i n t e r e s t i n t h e common e l e m e n t s a p p e r t a i n i n g t h e r e t o , i n t h e same manner and u n d e r t h e s a m e c o n d i t i o n s a s l i e n s o r encumb r a n c e s may a r i s e o r b e c r e a t e d upon o r a g a i n s t a n y other separate parcel of r e a l property subject t o i n d i v i d u a l ownership. " ( 2 ) No l a b o r p e r f o r m e d o r m a t e r i a l s f u r n i s h e d w i t h t h e c o n s e n t o r a t t h e r e q u e s t o f a u n i t owner, h i s agent, c o n t r a c t o r o r subcontractor, s h a l l be t h e b a s i s f o r t h e f i l i n g of a mechanic's o r materialman's l i e n a g a i n s t t h e u n i t o f a n y o t h e r u n i t owner n o t consenting t o o r r e q u e s t i n g t h e l a b o r t o be performed o r t h e m a t e r i a l s t o be f u r n i s h e d , e x c e p t t h a t c o n s e n t s h a l l be c o n s i d e r e d g i v e n by t h e owner o f a n y u n i t i n t h e c a s e o f emergency r e p a i r s t h e r e t o performed o r furnished with t h e consent o r a t t h e r e q u e s t of t h e manager. " ( 3 ) I f a l i e n becomes e f f e c t i v e a g a i n s t two o r more u n i t s , t h e owner o f e a c h u n i t s u b j e c t t o s u c h a l i e n s h a l l h a v e t h e r i g h t t o have h i s u n i t r e l e a s e d from t h e l i e n by payment o f t h e amount o f t h e l i e n a t t r i b utable t o his unit. The amount o f t h e l i e n a t t r i b u t a b l e t o a u n i t and t h e payment r e q u i r e d t o s a t i s f y s u c h a l i e n , i n t h e absence of agreement, s h a l l be determined by a p p l i c a t i o n o f t h e p e r c e n t a g e e s t a b l i s h e d i n t h e declaration. Such p a r t i a l payment, s a t i s f a c t i o n o r d i s c h a r g e s h a l l n o t p r e v e n t t h e l i e n o r from p r o c e e d i n g t o e n f o r c e h i s r i g h t s a g a i n s t any u n i t and t h e u n d i v i d e d i n t e r e s t i n t h e common e l e m e n t a p p e r t a i n i n g t h e r e t o n o t r e l e a s e d by payment, s a t i s f a c t i o n o r d i s c h a r g e . " T h i s i s o n e s e c t i o n o f t h e e n t i r e U n i t Ownership A c t and it i s t h e d u t y o f t h i s C o u r t t o i n t e r p r e t it i n s u c h a manner a s t o insure coordination with t h e other sections of t h e A c t , and fulfill legislative intent. Doull v. Wohlschlager, 141 Mont. 354, 377 P.2d 758 (1963); Aleksich v. Industrial Acc. Fund, 116 Mont. 127, 151 P.2d 1016 (1944). Reading the Act in its entirety, it becomes apparent that there are safeguards to insure that builders, mechanics, and materialmen involved in the initial construction of a project are to be fully compensated before individual units are sold. Furthermore, Big Sky failed to comply with these safeguards. Section 67-2303.1 allows the sale of units prior to the completion of construction of the "building", which the Act defines as a multiple unit building. However, the money from such sales must be placed in escrow. Disbursements cannot be made from this escrow fund until completion of the building and common elements or compliance with section 67-2303.2 through 2303.6, whichever occurs first. In any event, such disbursements are to be only for cost of construction, legal, architectural and financial feestand other incidental costs of the project. Sec- tion 67-2303.1(4) then specifically states: " * * * The balance of the moneys remaining in the fund shall be disbursed only upon completion of the building,.fYeeand clear of all mechanic's and materialmen's liens. * * * " (Emphasis added.) Big Sky did sell 18 units prior to completion of construction, however it failed to deposit the moneys from these sales in an escrow account as required, and failed to pay this lien. Section 67-2323 states: "Blanket mortqaqes and other blanket liens affecting unit at time of first conveyance or lease. At the time of the first conveyance or lease of each unit following the recording of the declaration, every mortgage and other lien affecting such unit including the undivided interest of the unit in the common elements, shall be paid and satisfied of record, or the unit being conveyed or leased and its interest in the common elements shall be released therefrom by partial release duly recorded. " (Emphasis added. ) Again Big Sky f a i l e d t o comply w i t h t h i s p r o v i s i o n . A t t h e t i m e of i t s f i r s t s a l e Big Sky had n o t s a t i s f i e d t h i s l i e n n o r d i d it o b t a i n a p a r t i a l r e l e a s e a s r e q u i r e d . The l i e n of Dutch Touch a r o s e , a t t a c h e d and became e f f e c t i v e a g a i n s t t h e p r o p e r t y when work was commenced, t h e f i l i n g merely p e r f e c t s t h e l i e n . C o n t i n e n t a l Supply Co. v. White, 92 Mont. 254, 266, 1 2 P.2d 569 (1932) s t a t e s : " * * * The l i e n c o n s t i t u t e s an i n t e r e s t i n t h e p r o p e r t y ; ' t h e f i l i n g e x t e n d s i t s l i f e and p r e s e r v e s it. "'The l i e n a t t a c h e s t o t h e s t r u c t u r e as t h e l a b o r i s performed o r t h e m a t e r i a l i s f u r n i s h e d and e x i s t s w i t h a l l of i t s f o r c e a t a l l t i m e s between t h e b e g i n n i n g o f t h e performance of l a b o r o r t h e f u r n i s h i n g of m a t e r i a l u n t i l t h e e x p i r a t i o n o f t h e t i m e w i t h i n which n o t i c e s of l i e n may be f i l e d . ' (Citation omitted.) "The t r u e f u n c t i o n o f t h e l i e n i s t o p r e v e n t subs e q u e n t a l i e n a t i o n s and encumbrances, e x c e p t i n subordination t o i t s e l f . " See a l s o B l o s e v . Havre O i l P.2d 738 ( 1 9 3 4 ) . & G a s Co., 96 Mont. 450, 461, 31 F u r t h e r m o r e , t h i s l i e n was o r i g i n a l l y e f f e c - t i v e as a b l a n k e t l i e n a g a i n s t t h e e n t i r e p r o j e c t under t h e Caird case. W e d i s a g r e e t h a t t h i s l i e n was r e n d e r e d i n v a l i d by t h e f i l i n g o f t h e d e c l a r a t i o n , a s h e l d by t h e d i s t r i c t c o u r t . I n s t e a d , w e a d h e r e t o t h e r a t i o n a l e o f t h e Wisconsin Supreme C o u r t when t h e y f a c e d t h e i s s u e i n S t e v e n s C o n s t . Corp. v . Draper H a l l , I n c . , 73 Wis.2d 104, 242 N.W.2d 893, 898 ( 1 9 7 6 ) . The Wisconsin c o u r t was a l s o c o n f r o n t e d w i t h a m e c h a n i c ' s l i e n based upon work performed d u r i n g i n i t i a l c o n s t r u c t i o n and a U n i t Ownership Act w i t h a p r o v i s i o n t h e same a s o u r s e c t i o n 67-2324, R.C.M. 1947. The Wisconsin s t a t u t e , S 703.09 W.S.A., i s i d e n t i c a l t o o u r s e c t i o n 67-2324, with t h e i r § 703.09(2) t h e same a s o u r s e c t i o n 67-2324 ( 3 ) . Their decision i n Stevens s t a t e s : " S t e v e n s and The Bruce Company a r g u e t h a t t h e i r l i e n s a r o s e and became e f f e c t i v e when t h e excavat i o n s began i n September o f 1971. They contend that no distinction should be made between when a lien arises and when a lien becomes effective. We agree with this proposition but it makes no difference in terms of the rights of the claimantappellants in this case. The word 'effective', in the context of construction liens, should be interpreted to mean 'capable of bringing about an effect.' A construction lien is capable of bringing about an effect at the time it arises, that is, when 'substantial excavation for the foundations' of the new project begin, as provided in sec. 289.01(4), Stats. The later events of giving notice and filing, as required by sec. 289.06, merely preserve and perfect a lien which is already effective in the sense of being capable of having an effect upon the liened land. "Acceptance of this position of appellants does not mean that sec. 703.09 (2) Stats., is inapplicable to the facts of this case. On the contrary, we conclude that this subsection still governs, even though the cliamants' liens were first 'effective' in September of 1971, before the condominium declaration was recorded. . "Subsection (2) provides that a proportional lien occurs whenever 'a lien becomes effective against 2 or more units.' Obviously the most frequently occurring situation in which a lien will become effective against two or more units is when repairs are made to the common areas of the condominium unit, and left unpaid. But we conclude that a lien, originally effective as a blanket lien against the whole property, becomes effective against two or more units within the meaning of sec. 703.09(2), Stats., when the property is made subject to the provisions of ch. 703 by the filing of a condominium declaration before the initiation of foreclosure proceedings against the property as a whole. "Thus it is not critical that the filing of the lien claims came after the condominium declaration was filed, as the trial court decided. Even if the claims were filed before the condominium declaration was recorded, only proportional liens would attach to the individual units. On the other hand, if foreclosure proceedings are begun before the condominium declaration is recorded, and a lis pendens filed, the situation is frozen so that the subsequent recording of a declaration does not transform the blanket lien into a proportional lien on individual units." Likewise, the mechanic's lien filed by Dutch Touch was not rendered inaalid when Big Sky filed its declaration, but remained a valid single lien, which was proportionately effective against each unit, pursuant to section 67-2324(3), R.C.M. 1947. The second issue presented involves the enforcement of the lien once it is established. The foreclosure of a mechanic's lien is governed by the rules of equity. Mont. 256, 211 P.2d 417 (1949). Cole v. Hunt, 123 The general rule is that a blanket construction lien against an entire property consisting of several parcels cannot be enforced in toto against less than all of such parcels. Annot. 68 A.L.R.3d 1300. The reason is that it would be inequitable to burden some lesser portion of the liened premises with charges for labor and materials which were not actually furnished to that particular parcel. Conse- quently, this single lien, proportionately effective against each unit, would only be enforceable against each unit proportionately. It is the duty of those purchasing, or taking liens on, property under construction or on which improvements are being made, to make inquiry to ascertain whether or not the property is encumbered by mechanics' or materialmen's liens, and such parties, having knowledge of the fact that the work is going on, are charged with constructive, if not actual, notice of any such lien as has attached to the premises. Continental Supply Co. v. White, supra. However, any unit owners, other than Big Sky, whose property is subject to Dutch Touch's mechanic's lien, were put into that position by Big Sky's total disregard of the provisions of the Unit Ownership Act concerning mechanics' liens and precompletion sales. Big Sky failed to place the proceeds of these sales, made prior to completion of construction, into an escrow account, as required by section 67-2303.1, R.C.M. 1947. Therefore, the mechanics' liens, effective against each unit so sold, were not satisfied from the escrow fund as contemplated by section 67-2303.1. 1947, Big Sky further ignored section 67-2323, R.C.M./whereby every blanket lien or blanket mortgage must be satisfied before the first conveyance or lease of a unit, or a partial release for such u n i t o b t a i n e d and r e c o r d e d . E q u i t y w i l l g r a n t t h e r e l i e f s o u g h t when i n view of a l l c i r c u m s t a n c e s t o deny it would p e r m i t one o f t h e p a r t i e s t o s u f f e r a g r o s s wrong a t t h e hands o f t h e o t h e r p a r t y who b r o u g h t about t h e condition. T h i s t e d v . Country Club Tower Corp., 146 Mont. 87, 405 P.2d 432 (1965) ; Dutton v . Rocky Mountain Phosp h a t e s , 1 5 1 Mont. 54, 438 P.2d 674 ( 1 9 6 8 ) . This Court cannot i g n o r e t h e f a c t t h a t t h i s s i t u a t i o n would n e v e r have o c c u r r e d , had Big Sky f u l l y complied w i t h t h e U n i t Ownership Act. E q u i t y demands t h a t Dutch Touch be a l l o w e d t o s a t i s f y t h e e n t i r e amount of i t s l i e n f i r s t from t h o s e u n i t s r e t a i n e d by Big Sky. T h e r e a f t e r , s h o u l d any amount o f t h e l i e n remain uns a t i s f i e d , Dutch Touch may s e e k p r o p o r t i o n a t e enforcement o f s u c h b a l a n c e a g a i n s t t h e 18 u n i t s p r e v i o u s l y s o l d by Big Sky a f t e r t h e owners o f t h e s e u n i t s a r e made p a r t i e s t o t h e a c t i o n . I n t h e r e c o r d t h e r e i s a motion by Big Sky t o j o i n t h e s e u n i t owners a s p a r t i e s d e f e n d a n t p u r s u a n t t o Rule 1 9 , M.R.Civ.P. T h i s motion was n e v e r r u l e d upon by t h e d i s t r i c t c o u r t . The Committee Note t o Rule 1 9 s t a t e s t h a t it i s c l e a r t h a t whenever f e a s i b l e t h e persons m a t e r i a l l y i n t e r e s t e d i n t h e s u b j e c t of a n a c t i o n s h o u l d be j o i n e d a s p a r t i e s s o t h a t t h e y may be h e a r d and a c o m p l e t e d i s p o s i t i o n made. Such i s t h e c a s e of t h e s e u n i t owners s h o u l d Dutch Touch have t o e n f o r c e any p o r t i o n of t h e l i e n a g a i n s t t h e i r u n i t s i n t h e e v e n t t h e u n i t s r e t a i n e d by Big Sky do n o t s a t i s f y t h e l i e n . For t h i s r e a s o n t h e motion o f Big Sky s h o u l d have been g r a n t e d . T h i s judgment o f t h e d i s t r i c t c o u r t i s v a c a t e d and t h i s c a u s e remanded t o r e h e a r t h e f o r c l o s u r e a c t i o n i n compliance with t h i s decision. Chief J u s t i c e I) We concur:

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